Italy’s Borrowing Costs Slip to Two-Year Low at 10-Year Sale

Italy sold 6.5 billion euros ($8.8 billion) of bonds today with rates falling to the lowest in more than two years as investors continue to shrug off the risk of political turmoil after next month’s election.

The Treasury in Rome on Wednesday sold 3.5 billion euros of 10- year debt at 4.17 percent, down from 4.48 percent at the previous auction on Dec. 28 and the lowest since Oct. 28, 2010. The Treasury also sold 3 billion euros of bonds due in 2017 to yield 2.94 percent compared with 3.26 percent on Dec. 28.

Italy’s bond yields have plunged since the European Central Bank pledged in July to do whatever it takes to defend the euro, providing a backstop against rising political risk. Front-runner Pier Luigi Bersani, the leader of the Democratic Party, has seen his support decline this week because of the party’s links to Banca Monte dei Paschi di Siena SpA, the lender that admitted hiding details of derivatives transactions from regulators. That may make it harder for the Democrats to assemble an outright majority in parliament.

“Investors are adjusting their portfolio by exiting low- risk assets as they are confident the global economy will return to growth,” Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam, said by phone after the auction. “This is also supporting peripheral debt though in Italy the risk of a hung parliament is certainly underestimated.”

Bond Redemptions

Today’s auction was probably helped by 21 billion euros in bond redemptions due on Feb. 1. The Treasury yesterday sold 8.5 billion euros of six-month bills at the lowest since March 2010.

Italy’s 10-year yield was up 6 basis points to 4.2 percent at 1:22 p.m. in Rome, leaving the difference with comparable- maturity German debt at 252 basis points.

“Elections will spark some volatility,” Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc in London, said in a Jan. 25 note. Should the Democrats and their allies fail to assemble a solid majority, “this could create a more fragmented parliament, potentially requiring bipartisan co-operation to implement some reforms,” he said.

Support for Bersani’s party declined by 1.1 percentage point to 30.7 percent after the Monte Paschi scandal emerged this month, according to a poll by EMG for La7 television published Jan. 28.

At today’s auction investors bid for 1.32 times the amount of the 10-year debt offered, down from 1.47 times Dec. 28, and for 1.3 times the amount of the five-year compared with 1.29 last month. Demand was “decent” considering the sale of a new 15-year benchmark earlier this month, Giansanti said.

Italy sold 6.5 billion euros ($8.8 billion) of bonds today with rates falling to the lowest in more than two years as investors continue to shrug off the risk of political turmoil after next month’s election.